University of Management and Technology

School of Business and Economics

Business Economics
MID TERM

Resource Person: Dr Rukhsana Kalim Total Marks: 20

Time Allowed 1:30minutes

Name____________________________ ID_________________________

Question # 01:

Assume that in a hypothetical economy with full employment and fixed resources, the
following amounts of consumer and capital goods are produced.

Consumer Goods Capital Goods

(Million in units) (Million in Units)
1 45
10 40
20 32
30 20
40 0
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Create a production possibilities curve for this table on the basis of the increasing
opportunity cost assumption and answer the following questions:

a. What is the opportunity cost of increasing the production of consumer goods from
20 million to 30 million units? What is the opportunity cost of increasing the
production of capital goods from 40 to 45 million units?
b. Take the point A on this curve at the combination of 30 units of consumer goods
and 20 units of capital goods.
c. Illustrate the inefficient production point labeled B, where resources are not fully
utilized.
d. Demonstrate graphically on the same curve (as in a part) what would happen if
new technology were created for producing both capital goods and consumer
goods.
(3)
Q#2 (a) Assume the supply curve is fixed, what effect will each of the following have on
the demand curve for product B? Mere statement is required

a. Product B becomes more fashionable?

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b. The price of product C, a substitute for B goes down

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c. Consumers expect falling prices in B in the near future.

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d. There is rapid upsurge in population growth

(b) How will the following changes in price affect total revenue (i.e whether total
revenue will fall, increase or remain unchanged?)

a. Price falls and demand is inelastic --------------------------------------------------

b. Price rises and demand is elastic --------------------------------------------------

c. Price falls and demand is elastic --------------------------------------------------

d. Price rises and demand is inelastic -----------------------------------------------------

(2+2)
Question # 03:
Calculate the price elasticity of demand for demand: Identify whether the
elasticity is elastic, inelastic, or unitary elastic.
a. The number of cans demanded of soft drink increases by 30 percent after its price
decreases by 40 percent.
b. The number of cone ice cream demanded at a super store increases from 80 to 100
per week when the price falls from Rs 20 to 15.
c. The number of videotaped movies demanded each weekend from a rental store
falls from 500 to 400 following an increase in the rental charge from $2.00 to
$2.40.
(3)

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Question # 4
(a) Assume the equilibrium wage rate in Pakistan for unskilled labor is Rs 5000 per
month. The government has set the price floor of Rs 7000 per month to be given
 to unskilled labor. What is the likely impact on the labor market. Explain with
the help of graph.

(b) Define the Law of Diminishing Returns.

© Fill in the table below:

Output Total Fixed Total Variable Total Cost Average Marginal

Cost Cost Total Cost cost
0 $80 $0 $ $
1 40 $
2 60
3 70
4 100
5 150
6 220
7 340
8 520

(2+2+2)

Question # 5 What are characteristics of a monopolistic firm? Explain the equilibrium in

the market in the short run when the firm is earning economic profit.
(4)